Article: Tax exempt funds and bonds-understanding it briefly.

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Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.

JULY 28,2006

Many of us are taking advantage of the benefit of tax exempts. It provides after tax income and measure of stability in balanced mix of assets. Another advantage is diversification. Tax exempts as part of a long term investment strategy can add value. Municipals are issued by State and local governments, to finance public projects-schools, civic projects and hospitals. Tax exempt mutual funds invest in these municipal bonds. Interest paid by issuers of municipals, typically are tax exempt from federal income taxes. Some cases state taxes may be exempt. Municipals typically yield less than similar taxable bonds.

However, you may find, depending on your tax bracket, municipal bond yields may be higher than taxable bond yields on a after tax basis. Tax exempts are generally less volatile than stocks. Tax exempt funds vs. individual bonds: Broad diversification-diversification with regard to varied securities, geography, varied default risks and maturities. Credit quality is carefully researched and assessed, along with structure of bond. Professional management-portfolio managers and analysts go into depth researching tax exempt investments.

Monthly income-monthly income can be reinvested or taken in cash. When investing in tax exempts you face the risk of rising interest rates, credit risks and inflation risks associated with underlying bonds held in the portfolio. You face distributions from gains on the sale of bonds purchased at discounted values and capital gain, you may face alternative minimum tax consequences in some circumstances, you may not get back your principal if fund share prices fluctuate, and you may face short term interest rates rising and long rates in a range. Rising rates are generally considered bad news for bond investors; as interest rates rise, prices of existing bonds fall.

However, the rising rates may also raise yields on newly purchased bonds. Also, bonds mature and proceeds can be invested into bonds that may have higher yields, which may partially offset price declines.

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